Thursday, May 8, 2008
The FSA discovers excessive concentration
If the UK slips into a systemic banking crisis, we won't be short of people to blame. Top of the list of guilty institutions will be the FSA. Since the FSA took control of financial sector regulation back in 1997, banks and building societies have run amok. At times, the FSA's lack of capacity and judgement reaches almost comical proportions.
The FSA's naivety was again on public display this week. Hector Sants, chief executive of the FSA,was guest speaker to the Building Societies Association's annual conference. He took the opportunity to "warn" his audience about the dangers of "excessive concentration in the buy to let market."
Over the last ten years, the number of buy to let mortgages has risen from a smidgen above zero to over one million. The time to warn about "excessive concentration" was about five years ago, just as the market was taking off and it became obvious that banks and building societies were taking on a potentially dangerous level of risk. Warning the building societies today, when they are struggling with liquidity and rapidly depreciating collateral is just a little too late.
His wisdom didn't stop at warning about "excessive" lending concentration in housing speculators. Saints also gave the building societies some advice on funding strategies. He took particular aim at building societies' over dependence on the wholesale market for funding liabilities. "If wholesale funding is being utilised, it should be in a proportionate manner and the overall funding model sensibly diversified. In particular, the wholesale component should be diversified in term and maturity."
Hello!!! Is there anyone in there? It is the FSA's job to ensure that the financial sector has appropriate liability management. The FSA should be monitoring key financial sector indicators like maturity structure, credit and default risk. When banks step out of line, it is the FSA's job to hammer them with fines.
The FSA isn't an advisory service for the financial sector. The FSA should regulate these institutions. It should protect the rest of society from dangerous risk taking by greedy banks, blinded by the profit motive. It needs to prevent banks from pushing out loans to individuals who have a high propensity to default. It needs to ensure that banks behave.
It is time to call a halt the FSA. Financial sector regulation should be returned to the Bank of England. Mr. Saints should be cut loose from the public sector and allowed to pursue a career more suited to his talents, which appears to be some kind of low level management consultant working within the retail banking sector. It is time we had a financial regulator that knew what it was doing.